The Returns At Kuantum Papers (NSE:KUANTUM) Provide Us With Signs Of What's To Come

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Kuantum Papers (NSE:KUANTUM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Kuantum Papers is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.01 = ₹138m ÷ (₹16b - ₹2.0b) (Based on the trailing twelve months to September 2020).

Thus, Kuantum Papers has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Forestry industry average of 9.7%.

Check out our latest analysis for Kuantum Papers

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kuantum Papers' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Kuantum Papers, check out these free graphs here.

How Are Returns Trending?

In terms of Kuantum Papers' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 6.5%, but since then they've fallen to 1.0%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

In summary, we're somewhat concerned by Kuantum Papers' diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 24% return over the last year, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Kuantum Papers does come with some risks though, we found 6 warning signs in our investment analysis, and 2 of those are concerning...

While Kuantum Papers may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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